Just came across this paper:
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"A Century of Stock Market Liquidity and Trading Costs"
BY: CHARLES M. JONES
Columbia Business School
ABSTRACT:
I assemble an annual time series of bid-ask spreads on Dow Jones
stocks from 1900-2000, along with an annual estimate of the
weighted-average commission rate for trading NYSE stocks since
1925. Spreads are cyclical, especially during periods of market
turmoil. The sum of half-spreads and one-way commissions,
multiplied by annual turnover, is an estimate of the annual
proportional cost of aggregate equity trading. This cost drives
a wedge between aggregate gross equity returns and net equity
returns. This wedge can account for only a small part of the
observed equity premium, but all else equal the gross equity
premium is perhaps 1% lower today than it was early in the
1900's. Finally, I present evidence that the transaction cost
measures that also proxy for liquidity - spreads and turnover -
predict stock returns one year or more ahead. High spreads
predict high stock returns; high turnover predicts low stock
returns. These liquidity variables dominate traditional
predictor variables, such as the dividend yield. The evidence
suggests that time-series variation in aggregate liquidity is an
important determinant of conditional expected stock market
returns.
*************************************
So, the bubble burst b/c of DECIMALIZATION!!!
Just kidding....
Slow day...
***********************************************
"A Century of Stock Market Liquidity and Trading Costs"
BY: CHARLES M. JONES
Columbia Business School
ABSTRACT:
I assemble an annual time series of bid-ask spreads on Dow Jones
stocks from 1900-2000, along with an annual estimate of the
weighted-average commission rate for trading NYSE stocks since
1925. Spreads are cyclical, especially during periods of market
turmoil. The sum of half-spreads and one-way commissions,
multiplied by annual turnover, is an estimate of the annual
proportional cost of aggregate equity trading. This cost drives
a wedge between aggregate gross equity returns and net equity
returns. This wedge can account for only a small part of the
observed equity premium, but all else equal the gross equity
premium is perhaps 1% lower today than it was early in the
1900's. Finally, I present evidence that the transaction cost
measures that also proxy for liquidity - spreads and turnover -
predict stock returns one year or more ahead. High spreads
predict high stock returns; high turnover predicts low stock
returns. These liquidity variables dominate traditional
predictor variables, such as the dividend yield. The evidence
suggests that time-series variation in aggregate liquidity is an
important determinant of conditional expected stock market
returns.
*************************************
So, the bubble burst b/c of DECIMALIZATION!!!
Just kidding....Slow day...
